Big Banks Told Not to 'Fix' a Fraud

Ohio's attorney general threw a wrench into the banking industry's push to quickly restart foreclosures by fixing faulty paperwork, and pressed them to modify mortgage loans.

In two letters released Friday, Attorney General Richard Cordray criticized a number of banks and loan-servicing companies, including Wells FargoWFC-0.48% & Co.; Ally Financial Inc.'s GMAC Mortgage; Bank of America Corp.BAC-1.38%; and J.P. Morgan ChaseJPM-0.74% & Co. Mr. Cordray said the banks are trying to paper over fraud committed in foreclosures with temporary fixes that don't address underlying problems in the banks' practices.

"It is not acceptable for a party who believes they submitted false court documents to merely replace those documents. Wells Fargo and any other banks are not simply allowed a 'do-over,'" he wrote in the letter to Wells. The other letter was sent to Ohio judges, who were asked to notify Mr. Cordray when banks file substitute affidavits.

He demanded that the banks vacate any court order or motion that was based on an improper paperwork. In an interview Friday, Mr. Cordray said the banks would "be well-served to work out a settlement with the borrowers to modify the loans and work out payments."

Mr. Cordray's letters come as several banks say they have reviewed their foreclosure procedures and are resuming evictions. But his insistence that they go beyond replacing affidavits by employees who have been labeled "robo-signers"—who didn't adequately review underlying foreclosure documentation—threatens to upend banks' efforts to resolve their foreclosure problems.

Mr. Cordray's strategy provide clues as to the goals of a 50-state probe, which was announced two weeks ago. Led by Iowa Attorney General Tom Miller, the effort was joined by top law-enforcement officers from all 50 states in response to reports of widespread errors in foreclosure filings and allegations of robo-signing.

"The banks are committing fraud on the court, essentially perjury, and then saying 'Whoops! You caught me! Here's some different evidence and use that instead,' " Mr. Cordray said in an interview Friday. "I know a lot of judges are not going to take kindly to that."

Bank of America declined to comment. A Wells Fargo spokeswoman said Friday the company intends to cooperate with Mr. Cordray's inquiries and doesn't "believe that any of these instances led to foreclosures which should not have otherwise occurred." She added that Wells Fargo has "chosen to submit supplemental affidavits out of an abundance of caution."

Tom Kelly, a J.P. Morgan spokesman, said the company is still reviewing foreclosure documents for mistakes and hasn't refiled any new or replacement affidavits. Gina Proia, a spokeswoman for GMAC, said her company is "not proceeding with foreclosure sales in Ohio or any state using a defective affidavit."

The aims of the 50-state probe were initially unclear. Some attorneys general, however, made reference to a 2008 settlement in which Bank of America agreed to an $8.4 billion loan modification program after its Countrywide Financial unit was probed for predatory lending practices.

Mr. Cordray declined to discuss the 50-state investigation or the conversations he has had with other attorneys general about the matter. Mr. Cordray, a Democrat, faces a Republican challenger for his office in Tuesday's general election.

Wells Fargo Chief Financial Officer Howard Atkins said in an Oct. 20 television interview that he was "confident with our policies and controls" related to foreclosures and that "the person at Wells who signs a foreclosure file is the same person as the person who reviews the file and it is not always done that way in the industry."

But on Oct. 28, Wells announced it was resubmitting affidavits for 55,000 pending foreclosures, suggesting that some of the paperwork might be flawed. In March, a Wells Fargo employee named Xee Moua said in a sworn deposition in a Florida foreclosure case that she signed between 300 and 500 foreclosure documents a day, without reviewing the numbers on the loan files for accuracy.

Asked if she verified the appropriate information, she said, "That's not part of my job description."

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